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on Utility Models and Prospect Theory |
| By: | Richard Peter (University of Iowa [Iowa City]); Pascal Toquebeuf (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes) |
| Abstract: | This paper introduces mean-preserving capacities for Choquet expected utility. A capacity is defined as mean-preserving when the value assigned to an event falls within an interval centered around its subjective probability, with the interval's size reflecting the perceived level of ambiguity. These capacities are based on the complementary independence axiom and feature a centrally symmetric core for decision-makers who are averse to ambiguity. To illustrate their practical value, we explore a series of economic applications including portfolio choice, self-insurance and self-protection, the value of a statistical life, and precautionary saving. Mean-preserving capacities offer intuitive predictions for both ambiguity-averse and ambiguity-loving individuals, often requiring fewer or no ancillary assumptions than alternative models. Moreover, they simplify the analysis of greater ambiguity considerably. |
| Keywords: | Choquet expected utility, Mean-preserving capacity, Comparative statics, Ambiguity attitude, Ambiguity |
| Date: | 2025–10–19 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05324776 |
| By: | Fenghua Wen; Xieyu Yin; Chufu Wen |
| Abstract: | We develop a theory of demand economics for an era of material abundance. The binding constraint on growth has shifted from insufficient aggregate demand to inadequate demand-tier upgrading. Our result is that, the new engine of growth lies in upgrading the demand hierarchy: higher-tier demands generate larger value-creation multipliers. The key mechanism is education-driven utility management. Education transforms the social utility function, raises the utility of higher-tier goods, and directs resources toward higher-value domains; this warrants a policy reorientation away from short-run aggregate stimulus toward education-centered, long-horizon investments in human capital. Methodologically, we build an estimable general-equilibrium framework. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.17121 |
| By: | Stéphane Bouché; Mikhail Pakhnin |
| Abstract: | We study a neoclassical growth model with population growth and agents who are heterogeneous in their discount factors. Population growth is interpreted as the entry of new infinitely-lived agents with zero initial endowments who are not included in the economic calculus of existing agents. We prove that when capital and labor are substitutes in production and utility is isoelastic, there exists a unique stationary equilibrium in per capita terms. A stationary equilibrium can take one of two forms: a Ramsey conjecture equilibrium, in which only the most patient agents own the entire capital stock, or a non-degenerate equilibrium, in which agents other than the most patient ones also hold positive amounts of capital. We show that introducing public debt, a labor income tax or a capital subsidy shifts the economy from a Ramsey conjecture stationary equilibrium to a non-degenerate one, and analyze the resulting relationship between income and inequality. |
| Keywords: | economic growth, heterogeneous discounting, inequality, ramsey conjecture, overlapping generations |
| JEL: | D15 D31 D50 E21 O40 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12213 |
| By: | Dong Yan; Ke Zhou; Zirun Wang; Xin-Jiang He |
| Abstract: | In this paper, we investigate a portfolio selection problem with transaction costs under a two-factor stochastic volatility structure, where volatility follows a mean-reverting process with a stochastic mean-reversion level. The model incorporates both proportional exogenous transaction costs and endogenous costs modeled by a stochastic liquidity risk process. Using an option-implied approach, we extract an S-shaped utility function that reflects investor behavior and apply its concave envelope transformation to handle the non-concavity. The resulting problem reduces to solving a five-dimensional nonlinear Hamilton-Jacobi-Bellman equation. We employ a deep learning-based policy iteration scheme to numerically compute the value function and the optimal policy. Numerical experiments are conducted to analyze how both types of transaction costs and stochastic volatility affect optimal investment decisions. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.21156 |
| By: | Alberto Baccini |
| Abstract: | This article challenges the conventional reading of Francis Ysidro Edgeworth by reconstructing his intellectual project of unifying the moral sciences through mathematics. The contribution he made in the first phase of his writing, culminating in \textit{Mathematical Psychics}, aimed to reconfigure utilitarianism as an exact science, grounding it in psychophysics and evolutionary biology. In order to solve the utilitarian problem of maximizing pleasure for a given set of sentient beings, he modeled individuals as ``quasi-Fechnerian'' functions, which incorporated their capacity for pleasure as determined by their place in the evolutionary order. The problem of maximization is solved by distributing means according to the individuals' capacity for pleasure. His radical anti-egalitarian conclusions did not stem from an abstract principle of justice, but from the necessity to maximize welfare among naturally unequal beings. This logic was applied not only to sentients of different evolutionary orders, such as Mr. Pongo, a famous gorilla, and humans, but also to human races, sexes, and classes. The system, in essence, uses the apparent neutrality of science to naturalize and justify pre-existing social hierarchies. This analysis reveals that the subsequent surgical removal of his utilitarianism by economists, starting with Schumpeter, while making his tools palatable, eviscerates his overarching philosophical system. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.20854 |
| By: | Francis Liu; Natalie Packham; Artur Sepp |
| Abstract: | This paper presents an option pricing model that incorporates clustered jumps using a bivariate Hawkes process. The process captures both self- and cross-excitation of positive and negative jumps, enabling the model to generate return dynamics with asymmetric, time-varying skewness and to produce positive or negative implied volatility skews. This feature is especially relevant for assets such as cryptocurrencies, so-called ``meme'' stocks, G-7 currencies, and certain commodities, where implied volatility skews may change sign depending on prevailing sentiment. We introduce two additional parameters, namely the positive and negative jump premia, to model the market risk preferences for positive and negative jumps, inferred from options data. This enables the model to flexibly match observed skew dynamics. Using Bitcoin (BTC) options, we empirically demonstrate how inferred jump risk premia exhibit predictive power for both the cost of carry in BTC futures and the performance of delta-hedged option strategies. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.21297 |
| By: | Heng-fu Zou (Institute for Advanced Study, Wuhan University) |
| Abstract: | We develop a unified, utility-based model of semi-endogenous growth in which a representative household (RH) and a social planner (SP) face identical feasibility and knowledge constraints, and in which automation/A.I. directly performs a fraction of research tasks. The framework is deliberately parsimonious-one state (the stock of ideas) and one intensive choice (the research share)-so mechanisms are transparent and results come in closed form. First, in a competitive reduced-form environment we solve RH and SP side-by-side, prove equivalence for growth, and derive a closed-form balanced-growth research share that cleanly separates levels (chosen by the research share) from rates (pinned by the idea law and the evolution of research effort). Second, we place automation inside R&D via a task aggregator and obtain a single organizing iden tity that links long-run idea growth to the growth of machine and human research capacity. Two closures-ideas-riding A.I. and “exogenous A.I. drift†-deliver testable expressions for per-capita growth and a simple sustainability condition under demographic headwinds. Off the balanced growth path, we provide an exact transition decomposition, including a reallocation term from the diffusion of automation. Third, embedding a Romer variety-expansion sector reveals a static markup wedge and a dynamic knowledge wedge; a minimal policy pair-a user-price subsidy for intermediates and an R&D prize/ wage subsidy-decentralizes the planner. The resulting toolkit offers suffcient statistics for measurement and policy design. |
| Date: | 2025–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:794 |